Option Strategies

Secured Put

In this scenario you don't own any shares, but you wouldn't mind owning Bank of America (BAC) shares if it went down a little in price. You're fairly sure that BAC has good long term potential so you want to take advantage while its down. Currently it is trading around $9.07/share. You think that if it drops any lower you want to buy. So you submit a "Sell to open" order for 10 Put options at the $9 strike price. Now two things will happen.
  1. Each option costs $1.18. So you will receive in cash the total premium. I.e., $1,180.
  2. Your brokerage firm will ensure that you have at least $9,000 in cash or cash equivalents. Why? Because by selling Put options you've given someone the right to sell you 1000 shares of BAC at $9/share. Your broker wants to make sure you can live up to your obligation. That's where the name "Secured" comes into play.